Corrective Action Plans Frequently Asked Questions

1. Corrective Action PlansFrequently Asked Questions Bonnie Little Graham bgraham@bruman.com Jenny Segal jsegal@bruman.com Brustein & Manasevit, PLLC Fall Forum 2012

2. Intro [N]ewlypurchased items of equipment were not consistently entered into the property tracking system or, if entered, some of the items of equipment remained in the warehouses undelivered, were delivered to an incorrect location, or were misplaced or stolen. As of 1998, VIDE began to implement the corrective actions necessary to revamp its property management systemas well as to correct other deficiencies in its administration of Federal grant programs. Progress was slow. As a result, VIDE was designated as a “high-risk” grantee and special conditions were imposed. Later, ED and VIDE entered into a compliance agreement that permitted VIDE to continue to receive funding while it implemented a structured plan to correct the administrative and programmatic deficiencies. Application of U.S. Virgin Islands Dept. of ED, Docket No. 05-04-R (Jan. 24, 2011). Brustein & Manasevit, PLLC

3. Agenda • When are corrective action plans necessary? • Can the state/grantee require a corrective action plan from locals/subgrantees? • What needs to be in a corrective action plan? • How are corrective actions enforced? • Can I appeal required corrective actions? Brustein & Manasevit, PLLC

4. Brustein & Manasevit, PLLC When are corrective action plans necessary?

5. Identifying Noncompliance • Monitoring by ED or grantee • OIG audit • A-133 single audit • Performance data • Financial data • Internal review Brustein & Manasevit, PLLC

6. Corrective Action Needed • Program Determination Letters • OIG Audit Report • Single Audit Report • Grant Award Notification – special conditions • Monitoring report Brustein & Manasevit, PLLC

7. Brustein & Manasevit, PLLC Can the state/grantee require a CAP from locals/subgrantees?

8. Authority • EDGAR 80.40 • Grantees are responsible for managing the day-to-day operations of grant and subgrant supported activities. Grantees must monitor grant and subgrant supported activities to assure compliance with applicable Federal requirements and that performance goals are being achieved. Grantee monitoring must cover each program, function or activity. Brustein & Manasevit, PLLC

9. Authority • EDGAR 80.12 • A grantee or subgrantee may be considered “high risk” if: • History of unsatisfactory performance • Is not financially stable • Has management system that does not meet EDGAR standards • Has not conformed to terms and conditions of previous awards • Is otherwise not responsible • Special condition or restriction may include: • Payment on a reimbursement basis, • Withholding authority to proceed to next phase until receipt of evidence of acceptable performance, • Requiring additional, more detailed financial reports, • Additional project monitoring, • Requiring technical or management assistance, OR • Establishing additional prior approvals Brustein & Manasevit, PLLC

10. Brustein & Manasevit, PLLC What needs to be in a corrective action plan?

11. Corrective Action Plans • Objective (measurable) • Timeline • Identify person responsible • Budget • Data • Deliverables Brustein & Manasevit, PLLC

12. Brustein & Manasevit, PLLC

13. Example: • Noncompliance: Insufficient internal controls • Goal of corrective actions: • Implement a comprehensive system of internal controls that reasonably ensure: (1) obligations and costs are in compliance with applicable state and federal rules; (2) funds, property, and other assets are safeguarded against waste, loss, and unauthorized use or misappropriation; and (3) revenues and expenditures are properly recorded and accounted for. Brustein & Manasevit, PLLC

14. Example – Corrective Actions • Assess current level of controls over federal funds to determine if they are appropriate for level of risk. • 1. Establish an Assessment Team to oversee the assessment process. • Assessment Team will be responsible for: • reviewing audit reports, monitoring reports, independent consultant reports, etc. to determine what additional assessments need to be done for federal programs • ensuring assessment objectives are clearly communicated • ensuring the assessment is carried out in a thorough, effective and timely manner • identifying and ensuring adequate funding and resources are made available Brustein & Manasevit, PLLC

15. Example (cont.) Brustein & Manasevit, PLLC • 2. Evaluate the entity’s control environment • Ensure all areas of authority are clearly defined • Ensure authority and responsibility are appropriately delegated • Ensure employees have access to appropriate training • Ensure employees have necessary skills to perform all job functions • Ensure management has resources to appropriately evaluate, counsel, compensate and discipline employees • 3. Identify internal and external risks that may prevent the organization from meeting its objectives. • Review prior single audit report, OIG audit reports, internal audit findings to identify common problems, deficiencies, and risks • Analyze identified risks for their potential effect on federal programs

16. Example (cont.) 4. Evaluate existing policies and procedures related to control activities to ensure agency objectives are met. • Ensure proper segregation of duties • Ensure there are adequate physical controls over assets • Ensure actions require appropriate authorization • Ensure appropriate controls over information systems (e.g., general controls, application controls) 5. Ensure staff has access to timely and accurate information on entity policies, as well as state and federal requirements. 6. Evaluate entity’s monitoring procedures. Brustein & Manasevit, PLLC

17. Example (cont.) B. Based on the assessment, implement new controls or re-design existing controls as appropriate. • Document the results of the assessment, including a complete description of the current controls. • Prepare a report of recommended changes. Report will address current areas of weaknesses and recommend improvements. • Entity will review the report and make a final decision on the recommendations. C. Establish a strategic plan for future monitoring and assessment activities, including entity self-assessments, internal audit reviews, and direct testing. Brustein & Manasevit, PLLC

18. Example For each corrective action, include: • Completion date • Measurable objective • Responsible person/office • Confirmation underlying problems resolved Brustein & Manasevit, PLLC

19. Corrective Action Plan • Over-promise • Under-promise • Unrealistic timeframe • Does not address the issue Correcting noncompliance can be a lengthy process, measured in years rather than months Brustein & Manasevit, PLLC

20. Brustein & Manasevit, PLLC How are corrective actions enforced?

21. Enforcement Whenever the Secretary has reason to believe that any recipient of funds under any applicable program is failing to comply substantially with any requirement of law applicable to such funds, the Secretary may— • withhold further payments under that program, • issue a complaint to compel compliance through a cease and desist order of the Office,  • enter into a compliance agreement with a recipient to bring it into compliance, •  take any other action authorized by law with respect to the recipient. Any action, or failure to take action, by the Secretary under this section shall not preclude the Secretary from seeking a recovery of funds. • GEPA, 20 USC 1235c Brustein & Manasevit, PLLC

22. Cease and Desist Order • ED may issue a complaint to a recipient that: • Describes the factual and legal basis for ED’s belief that the recipient is failing to comply substantially with a requirement of law; and • Contains a notice of hearing at least 30 days after service of the complaint • Recipient may defend against the complaint • Order is issued • Report in writing stating its finding of fact; and • Order requiring cease and desist from the practice, policy or procedure which resulted in the violation. • Secretary may: • Withhold amount payable • Submit to Attorney General to enforce • 20 USC 1234e Brustein & Manasevit, PLLC

23. Compliance Agreements • Discretionary authority • Before entering into the agreement, hearing determines compliance is not feasible until a future date • A compliance agreement under this section shall contain— • (1) an expiration date not later than 3 years from the date of the written findings under subsection (b)(2) of this section, by which the recipient shall be in full compliance with the applicable requirements of law, and • (2) those terms and conditions with which the recipient must comply until it is in full compliance. • GEPA, 20 USC 1234f Brustein & Manasevit, PLLC

24. Compliance Agreement Pros Cons Heightened federal oversight Deadlines Inflexible Expensive • Continue to receive federal funding • Clear requirements and deadlines Brustein & Manasevit, PLLC

25. Enforcement • Withholding of funds • Reimbursement with special conditions • High risk designation Brustein & Manasevit, PLLC

26. Withholding of funds • If ED/state determines a grantee/subgrantee has substantially not complied with an applicable Federal requirement, it may suspend or withhold payments. 34 C.F.R. § 80.43(a). • Withholding: • Reasonable notice of intent to withhold and opportunity for a hearing with an impartial hearing officer. 20 U.S.C. 1232c(b)(2). • Withhold until state is satisfied there is no longer a failure to comply. • Suspending: • Must provide notice to the grantee/subgrantee and allow it 15 days to show cause why the suspension should not take effect. 20 U.S.C. 1232c(b)(2). • If the grantee/subgrantee does not show cause, may suspend funds for 60 days Brustein & Manasevit, PLLC

27. Reimbursement with Special Conditions • SEAs are responsible for ensuring all expenditures are lawful (including subgrantees’ expenditures) and for ensuring all findings of noncompliance are resolved. 34 CFR 80.40(a). • Discretion to impose special conditions. For example: SEA could reimburse 80% of each Federal draw upon receipt of the summary reports and detailed lists, and then reimburse the remaining 20% after sampling certain expenditures and verifying detailed supporting documentation (Examples of such documentation could include: time and effort documentation supporting payroll charges and requisition requests; purchase orders; contracts; receiving documents; invoices; canceled checks for non-payroll charges). Is this reimbursement scheme “withholding”? Brustein & Manasevit, PLLC

28. High Risk Designation • After placing the subgrantee on high risk, the grantee must impose special conditions or restrictions that correspond to the high risk condition. Such special conditions or restrictions may include: • Payment on a reimbursement basis; • Withholding authority to proceed to the next phase until receipt of evidence of acceptable performance within a given funding period; • Requiring additional, more detailed financial reports; • Additional project monitoring; • Requiring the grantee or subgrantee to obtain technical or management assistance; or • Establishing additional prior approvals. • 34 CFR 80.12. Brustein & Manasevit, PLLC

29. Brustein & Manasevit, PLLC Can I appeal required corrective actions?

30. Appeal • Disallowance v. Corrective Action • GEPA permits an appeal of a disallowance decision • No appeal of corrective actions Brustein & Manasevit, PLLC

31. Appeal Disallowance decision: • Compromise of claims under GEPA • Claim is for $200,000 or less, or • Difference between the amount of the claim and the amount agreed to be returned is less than $200,000, • And • The collection of the amount by which the claim is reduced under the compromise would not be practical or in the public interest, and • The practice that resulted in the disallowance decision has been corrected and will not occur. • 34 CFR 81.36 Brustein & Manasevit, PLLC

32. Brustein & Manasevit, PLLC Examples

33. For example….. • In one jurisdiction ED issued 70 Page PDL, which determined all findings were either: • 1. Resolved and closed because ED had received sufficient documentation that corrective action was already in place; or • 2. Required further corrective action: • Please note that corrective action is required for some of these audit findings, as well as audit findings not specifically addressed in this PDL. [ED] will continue to work with [you] to implement corrective actions required by this PDL. • Emphasized the importance of: • 1. Producing records at the time they are requested by the auditors and complying with the requirements in 76.730(e) of EDGAR to keep records “to facilitate an effective audit;”’ and • 2. Working with ED (not being adversarial). Brustein & Manasevit, PLLC

34. For example…. • A second jurisdiction received a 76 page PDL regarding two single-audits. Did not demand recovery of any funds, but mandated several corrective actions, such as: • MOE: Review MOE calculation methodologies and update; use audited data; and complete MOE calculations in a timely manner and communicate data to LEAs to ensure timely completion of A-133 audits. • Is audited data required? • Subrecipient Monitoring: Process for identifying “high risk” grantees under EDGAR 80.12; conduct fiscal monitoring (cannot rely solely on A-133 audits). • Comparability: Develop and implement an indicator for monitoring comparability and integrate this indicator into protocols for subrecipient monitoring. Brustein & Manasevit, PLLC

35. For example… Philadelphia • OIG Audit Report: • Revise its inventory policies and procedures to include items, such as cell phones, PDA’s, and digital cameras, which are easily pilfered and sought after, and develop a process to ensure that all items receive a property code and that property transfers are properly recorded. • PDL sustained auditors’ recommendation. Brustein & Manasevit, PLLC

36. For example… Philadelphia • Policies to inventory items with an acquisition cost of $500 or more “failed to meet these requirements” because they did not specifically address controls to avoid loss or theft of “particularly susceptible items” such as PDAs, cell phones, and digital cameras. Brustein & Manasevit, PLLC

37. For example… Colorado Colorado OIG Audit Report: • Document or return $24 million in personnel costs • Adjust charges, as necessary, based on actual effort • Work with the Department to determine the most appropriate approach to account for personnel costs, including consideration of alternate methods allowed for under OMB Circular A-87 • Develop and implement enhanced policy and procedures for the system that was determined • Provide training for all CDE employees, supervisors, and managers on how to properly record and certify personnel costs to be paid with Federal education funds Brustein & Manasevit, PLLC

38. For example… Colorado CDE stated that it would: • Provide the Department with its new methodology for recording employee effort, which will not use predetermined allocations to charge personnel costs. • Expects its new methodology for recording employee effort to be fully operational on July 1, 2010. It will develop separate policy manuals for supervisors and employees covering the new methodology. • Train supervisors and employees on its new methodology for recording employee effort to ensure conformance before it becomes effective on July 1, 2010. Brustein & Manasevit, PLLC

39. For example… Colorado • We commend CDE for initiating timely corrective actions in response to the audit’s finding and recommendations. The actions that CDE describes in its comments, in response to our recommendations, would appear to address our finding, but the Department will ultimately make this determination. • PDL: We find that the policies and procedures provided generally appear sufficient to establish an effective system to account for the distribution of effort for employees’ who work on multiple programs, however we have questions regarding implementation … • Single audit findings! Brustein & Manasevit, PLLC

40. Questions? Brustein & Manasevit, PLLC

41. Disclaimer This presentation is intended solely to provide general information and does not constitute legal advice.  Attendance at the presentation or later review of these printed materials does not create an attorney-client relationship with Brustein & Manasevit, PLLC.  You should not take any action based upon any information in this presentation without first consulting legal counsel familiar with your particular circumstances. Brustein & Manasevit, PLLC